Summary of Allegations

1. The Commission brings this enforcement action, charging Defendants with fraud in connection with the offer and sale of $189 million in debt securities issued between 1997 and 2002. The action further charges that defendants CFC and Fund VI are operating unlawfully as unregistered investment companies in violation of the Investment Company Act of 1940 (the "ICA") and that all securities offerings by them to date have been unlawful.

2. Defendant Hershon owns IBF and all or the majority interest in several affiliated companies that together constitute the so-called "InterBank Companies." The InterBank Companies are engaged in an investment business, and IBF provides the capital for these investments through three (formerly seven) wholly-owned special purpose corporations or "funds" (the "IBF Funds"), including defendants CFC and Fund VI.

3. Between February 1996 and February 2002, the original seven IBF Funds raised nearly $195 million from about 3,100 investors in successive offerings, consisting primarily of unsecured subordinated high yielding notes in private placements. Nearly half of this total was raised in 2001. CFC is the largest IBF Fund with $182 million in notes on its books. Fund VI raised about $7.2 million through the public offering of unsecured, high yield bonds. Most of the investors are individuals, not institutions.

4. In connection with the offer and sale of securities, Defendants made numerous and repeated material misrepresentations and omissions of fact.

5. The IBF Funds have been able to operate because defendants IBF and Hershon routinely moved offering proceeds between these entities in order to meet cash flow needs - amounting to tens of millions of dollars of inter-fund transfers. These material related-party transfers have never been disclosed to investors. Nor have Defendants disclosed the significant extent to which interest payments to investors have been made out of current and future offering proceeds.

6. Defendants also failed to disclose millions of dollars in transfers between IBF and the IBF Funds that were designed to hide - and did hide from investors - millions of dollars in losses sustained by the investment loan portfolios of the IBF Funds. As a result, the financial statements of the IBF Funds materially overstated net income. Moreover, Defendants regularly published return statistics about the IBF Funds and the investment program that likewise were materially overstated, in some instances by as much as 50 percent.

7. At the same time, IBF affiliates owned by Hershon have regularly generated cash fees from the note and bond offerings. One such affiliate received five percent off the top of every dollar raised in the CFC offerings as an "administrative fee," and it or another Hershon-owned affiliate received other management fees on an annual basis ranging up to two percent of assets under management of CFC and Fund VI.

8. Not only did they commit fraud; CFC and Fund VI are operating in violation of the ICA.

9. CFC and Fund VI claim in offering materials that they are not required to register as investment companies under the ICA because of an exclusion in the ICA for issuers that are "primarily engaged" in "purchasing mortgages or other liens on or interests in real estate." However, CFC and Fund VI are not in the business of purchasing mortgage loans or other liens on or interests in real estate. They are investment companies, not in compliance with - and not in a position to comply with - the material safeguards the ICA imposes on such companies for the benefit of investors. Indeed, noncompliance with two provisions of the ICA is vital to their operations: the prohibition against extreme leverage and the prohibition on affiliated transactions.

10. The IBF Funds depend almost entirely upon debt financing to provide the capital for the InterBank Companies' investment program, which involves making high-risk loans and other risky investments. However, the ICA requires that debt securities issued by an investment company have asset coverage of at least 300 percent - a requirement that CFC and Fund VI have never satisfied.

11. CFC's and Fund VI's respective business also depends upon being able to invest in and through affiliated parties. Most of their investments involve affiliated party transactions prohibited by the ICA.

12. Because CFC and Fund VI are not registered as investment companies under the ICA, all securities offerings to date by them and predecessor companies have been unlawful.

Violations

13. By virtue of the foregoing conduct:

a. CFC and Fund VI, directly or indirectly, singly or in concert, have engaged and continue to engage in acts, practices and courses of business that constitute violations of Section 7 of the ICA, 15 U.S.C. § 80a-7.

b. All Defendants, directly or indirectly, singly or in concert, have engaged in acts, practices and courses of business, that constitute violations of Sections 17(a)(1), (2) and (3) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77q(a)(1), (2) and (3).

c. All Defendants, directly or indirectly, singly or in concert, have engaged in acts, practices and courses of business that constitute violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

14. Unless Defendants are preliminarily and permanently restrained and enjoined, they will again engage in the acts, practices and courses of business set forth in this Complaint and in acts, practices and courses of business of similar type and object.

Jurisdiction and Venue

15. The Commission brings this action pursuant to the authority conferred upon it by Section 42(a) of the ICA, 15 U.S.C. § 80a-41(a), Section 20(b) of the Securities Act, 15 U.S.C. § 77t(b), and Section 21(d)(1) of the Exchange Act, 15 U.S.C. § 78u(d)(1), seeking to restrain and enjoin permanently the Defendants from engaging in the acts, practices and courses of business alleged herein. The Commission also seeks an order:

a. preliminarily enjoining CFC and Fund VI from further violating the ICA;

b. freezing the contents of an escrow account maintained by IBF, CFC and Fund VI for the benefit of investors and the Commission;

c. appointing a trustee to take possession of the assets of CFC and Fund VI;

d. directing CFC and Fund VI to provide an accounting;

e. ordering CFC and Fund VI to disgorge all offering proceeds because those proceeds were unlawfully raised in violation of the ICA; and

16. This Court has jurisdiction over this action pursuant to Sections 42 (a) and (d) and Section 44 of the ICA, 15 U.S.C. §§ 80a-41(a), (d) and 15 U.S.C. § 80a-43; Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a); and Sections 21(e) and 27 of the Exchange Act, 15 U.S.C. §§ 78u(e) and 78aa.

17. Defendants, directly and indirectly, have made use of the means and instrumentalities of interstate commerce, or of the mails, in connection with the transactions, acts, practices and courses of business alleged herein. Certain of these transactions, acts, practices and courses of business occurred in the Southern District of New York, including, among other things, the purchase and sale of notes and bonds by and to investors in New York City. In addition, throughout the period of the note sales, the placement agent for CFC and predecessor entities maintained its offices at Rockefeller Center in the Southern District of New York, and numerous investments made by CFC, its predecessor entities and Fund VI were made through IBF affiliates having offices in New York City.

18. On June 7, 2002, IBF, CFC and Fund VI filed for protection under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. According to affidavits filed with the bankruptcy petitions, the bankruptcy filings were made to avoid having a federal district court impose a trustee upon CFC and Fund VI pursuant to Section 42(d) of the ICA. Pursuant to Section 362(b)(4) of the Bankruptcy Code, 11 U.S.C. § 362(b)(4), the Chapter 11 filings do not operate to stay this action or affect this Court's ability to impose a trustee upon CFC and Fund VI.

The Defendants

19. CFC is a Delaware corporation with its principal place of business in Washington, D.C. Formed in 1999, CFC was originally named IBF Special Purpose Corporation VII ("Fund VII"). Fund VII initially sought to raise $25 million through the issuance of unsecured subordinated notes under a private placement memorandum dated May 10, 1999. It increased the offering to $50 million under an amended private placement memorandum dated August 29, 2000, and it further increased the offering to $100 million under a supplemental private placement memorandum dated June 27, 2001. In October 2001, Fund VII merged with two smaller IBF Funds and changed its name to CFC. At that time, CFC increased the total offering amount to $200 million under a supplemental private placement memorandum dated October 1, 2001. In January 2002, CFC merged with a fourth IBF Fund, which had itself issued about $50 million in subordinated notes in private placements. As a consequence of the mergers, CFC now carries $182 million in investor notes on its books. In January 2002, CFC ceased offering securities.

20. Fund VI is a Delaware corporation formed in 1999, having its principal place of business in Washington, D.C. In August 2000, it began offering $50 million in current and accretion subordinated bonds in a public offering. The bonds mature on a rolling basis and bear or accrete interest at rates of eight percent to 10.75 percent per annum. Fund VI has raised about $7.2 million through the public offering and, at December 31, 2001, it had invested approximately $2.5 million in three assets, two of which it acquired from other IBF Funds. In 2001, it loaned another $1.3 million to the parent company, defendant IBF, in the form of an unsecured, non-interest bearing loan. In January 2002, Fund VI suspended its offering of securities.

21.IBF is a Delaware corporation, wholly owned by Hershon, having its principal place of business in Washington, D.C. IBF is the parent of the IBF Funds.

22. Hershon, age 54, resides in Arlington, Virginia. Hershon is the chief executive officer ("CEO"), president and director of CFC, and he is the CEO and a director of Fund VI. He obtained both a Masters and Doctorate in Business Administration from Harvard University in 1973 and 1975, respectively. As CEO and a director, Hershon is involved in the day-to-day management of IBF, CFC and Fund VI, including, but not limited to, deciding and controlling the investments and public disclosures that defendants CFC and Fund VI have made.

Other Relevent Persons

23. IBF Funds were formed in succession between 1996 and 1999 and are referred to herein as Funds I through VII. Funds I through IV and Fund VII issued private placement notes over the period 1996 and January 2002. Fund VI is separately described above. Fund V is a small private equity fund formed in 1999. It is not a defendant in this case. Each private note fund issued five-year notes bearing interest at rates between 8 and 12 percent annually plus additional interest equal to the noteholder's pro rata share of 10 percent of the respective IBF Fund's gross profit. Fund I offered notes under a private placement memorandum dated February 16, 1996. Fund II offered notes under a private placement memorandum dated January 21, 1997. Fund III offered notes under a private placement memorandum dated April 10, 1998. Fund IV offered notes under private placement memoranda dated February 17, 1998, February 12, 1999, February 15, 2000 and supplemental private placement memoranda dated November 7, 2000, July 5, 2001 and October 30, 2001. In 2000, IBF redeemed Fund I's $2.5 million in outstanding notes. In 2001 and early 2002, IBF merged Funds II, III and IV into CFC. Today, there are just three IBF Funds: CFC, Fund VI and Fund V.

24. InterBank Brener Brokerage Services, Inc., ("IBBS") is the so-called "hospitality division" of the InterBank Companies and is wholly owned by Hershon. It maintains an office in New York City. IBBS evolved from Hershon's acquisition of Brener Hospitality, Inc. in the early 1990s, which provided brokerage and advisory services for national and international purchases and sales of hotel properties. Initially, IBBS derived revenue primarily from commissions or advisory fees. Over time, IBBS shifted its focus to identifying investment opportunities for the IBF Funds.

25. Interbank Capital Group ("ICG") maintains an office in New York City and is the "merchant banking" division of the InterBank Companies. It was formed in 1998 and is owned 67 percent by Hershon and 33 percent by a partner. Its principal business is investment banking.

Background

26. Hershon formed IBF in 1996. His purpose was to create a pool of capital that would allow Hershon to buy distressed loans from the Resolution Trust Corporation or other sellers or to invest in turn around situations. The investment plan was to restructure or otherwise rehabilitate these non-performing loans and sell them at a profit. Hershon's initial idea was to raise $10 million through a special purpose entity. By the end of January 2001, Hershon had raised nearly $195 million through seven IBF Funds that were formed in succession between 1996 and 1999.

27. Through June 2001, as the offerings grew larger, the offering memoranda and other disclosure documents for each of the IBF Funds emphasized the purchase of non-performing loans as the investment objective. However, Hershon realized by 1997 that he could not accomplish this objective because such loans were not available in the marketplace. As a result, in 1998 and 1999, Hershon changed the investment plan and began originating loans and other investments through two of the InterBank Companies, IBBS and ICG.

28. In 1998, IBBS began originating high-risk hotel development and acquisition loans. The IBF Funds funded these deals by making loans to IBBS, or to the IBBS client directly or to another IBF affiliate in cases where, for example, the IBF affiliate was itself investing in the project.

29. In or about 1999, the IBF Funds also began financing acquisitions identified by ICG. ICG's principal investment focus was on so-called "same industry consolidations." In these transactions, the IBF Funds lend money to a shell company, which, in turn, acquires a so-called "platform" company in a particular industry. As part of the deal, the InterBank Companies end up owning all or most of the equity in the platform company. The platform company then acquires other companies in the same industry. These acquisitions are funded by the IBF Funds. Defendants' investment objective is to expand these platform companies until they are large enough and profitable enough to sell.

30. By 2000, virtually all investments of the IBF Funds were generated by IBF affiliates, primarily IBBS and ICG. These affiliates derived essentially all of their revenues from fees earned in transactions funded by the IBF Funds.

The ICA Registration Violations

31. Both CFC and Fund VI hold themselves out as being in the business of making investments in securities. According to its June 2001 prospectus, the business of CFC is to "identify and invest funds in higher risk alternative financing opportunities outside those targeted by traditional lending institutions." The prospectus sets out the "Current Investment Strategy," which is to "achieve current yield and appreciation." It notes that "[m]anagement has broad discretion in selecting our investments." The current Fund VI prospectus supplement similarly emphasizes an "investment" objective, advising prospective bond purchasers that Fund VI intends to "invest approximately 82% of the proceeds and reserve 5% for working capital."

32. Neither CFC nor Fund VI has ever registered with the Commission as an investment company. Both claim in offering materials that they fall within an exclusion under the ICA for issuers that are "primarily engaged" in the business of "purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." However, despite this claim, defendants have invested most of the offering proceeds in assets that are not mortgages or other liens on or interests in real estate. For the most part, defendants have invested offering proceeds in commercial loans that are not secured by real estate.

33. CFC's investment portfolio today is a hodgepodge of different investments. At the end of 2001, its single largest investment, about $20 million, was in US Mills, a breakfast cereal company. CFC had invested about $11 million in Investment & Benefit Services, Inc., a company that runs other companies' employee benefits programs, and about $7 million in Tuned In Sports, a company that sells outdoor equipment and sporting goods like body boards and tents. Other investments included hotels and beach resorts, an accounts receivable factoring company, a small start-up company that performs chest x-rays, a magazine, a securities brokerage concern and a company that offers financial services. Historically, the portfolio has included investments in four motion picture projects, a plastic injection molding company and a company that makes and sells custom-ordered personal computers and servers.

The Misleading Disclosures

34. There is no question that IBF's disclosures from the beginning have cautioned that IBF's investment strategy "involve[s] a high degree of business and financial risk that can result in substantial losses." However, the private placement memoranda do not disclose the true extent of the risk, and they falsely suggest that the IBF Funds have performed much better than they actually have.

35. To support the sale of nearly $182 million in notes by CFC (and its predecessor IBF Funds) and $7.2 million in bonds by Fund VI, the offering materials and other disclosure documents misrepresented and omitted material facts in three subject areas. First, the offering materials and other periodic disclosures never disclosed that the respective IBF Fund's ability to operate depended upon inter-fund transfers of offering proceeds amounting to tens of millions of dollars. Second, Defendants did not disclose that interest payments to investors were made in significant part out of current or future offering proceeds. Third, Defendants concealed millions of dollars in loan losses and their impact on the financial statements and return statistics published by CFC, its predecessor entities and Fund VI.

36. As the CEO, president and director of CFC and CEO and a director of Fund VI, Hershon was responsible for and controlled the disclosures contained in private placement memoranda of CFC, its predecessor companies, and Fund VI. He was also responsible for and controlled disclosures contained in materials circulated to broker-dealers and investors on a periodic basis.

Fraudulent Disclosures About Cash Flow

37. Throughout the history of the IBF Funds, only about 50 percent of the investment portfolio produced cash income on a current basis - a fact that has never been disclosed to investors. To meet the cash needs of the IBF Funds, IBF routinely transferred loan assets between IBF Funds at par, meaning that the acquiring fund paid the selling fund all principal, interest and fees outstanding, without regard to the value of the loan. IBF used these transfers as a means of tapping fresh offering proceeds available in the IBF Fund that was acquiring the loan. From the inception of Fund II through 2001, these inter-fund transfers amounted to tens of millions of dollars. Yet, the frequency and magnitude of these transfers were never disclosed in the financial statements appended to the private placement memoranda for CFC or any of its predecessor IBF Funds.

38. A striking example of these inter-fund transfers occurred upon the liquidation of Fund I in 2000, when IBF and Hershon caused CFC (then Fund VII) to acquire, at Fund I's cost, about 40 percent of Fund I's loan portfolio for cash, so that Fund I could pay off its noteholders. These transfers were not at arms length, and were made without regard to the actual value of the assets Fund VII was acquiring.

39. Under generally accepted accounting principles ("GAAP"), CFC was obligated to disclose these material related-party transfers. However, other than generic disclosures saying that, from time to time, the IBF Funds acquire loans from one another, CFC's financial statements, as reported in the June 27, 2001 and October 1, 2001 private placement memoranda, did not disclose the purchase of these assets from Fund I, or the fact that the transactions were done without regard to the actual value of the acquired assets.

40. Hershon knew, or was reckless in not knowing, that disclosure of these material facts was required and should have been made to investors.

41. Not only did Defendants fail to disclose these transfers; CFC and Fund VI used the redemption of Fund I as evidence of IBF's success in the investment business. CFC's October 1, 2001 private placement memorandum contained a chart reporting on the performance of all seven IBF Funds. The chart disclosed that Fund I fully redeemed all of its outstanding investor notes, without disclosing that these redemptions were possible only because IBF transferred fresh offering proceeds from CFC to acquire for the CFC loan portfolio 40 percent of Fund I's assets, without regard to the value of those assets.

42. Likewise, on July 16, 2001, Fund VI filed a post-effective amendment with the Commission, which disclosed a similar chart as containing facts that "may be material" to investors in Fund VI. Fund VI did not disclose the source of the Fund I redemptions.

43. Hershon knew, or was reckless in not knowing, that disclosure of these material facts was necessary in order to make the statements contained in the CFC and Fund VI disclosure documents not misleading.

Fraudulent Disclosures About the Source of Interest Payments

44. From the inception of Fund I in 1996, interest payments to noteholders of the IBF Funds have always been funded in significant part out of fresh offering proceeds because operating cash flows have never been sufficient to cover these interest payments.

45. The fact that interest payments were funded in significant part out of note proceeds was a material fact because investors would have wanted to know that CFC's ability to make good on its obligation to pay interest depended substantially on its ability to raise money through the offering of more notes.

46. Prior to June 2001, the only disclosure CFC made about the source of interest payments was that "initial interest payments may not be from the Company's earned income." This disclosure was contained in the May 10, 1999 private placement memorandum.

47. This disclosure was materially misleading because, at the time of this disclosure, Hershon knew from his experience with Funds I, II and III that interest payments would likely be made out of note proceeds well beyond the "initial payments." Hershon knew, or was reckless in not knowing, that this disclosure was materially misleading.

48. Beginning in 2001, CFC made some additional disclosures about the source of interest payments to investors that were also materially misleading.

49. CFC's October 1, 2001 private placement memorandum stated that (i) some loans in the investment portfolio may not produce cash income on a current basis, and (ii) it may be necessary to make interest payments to noteholders out of offering proceeds "if cash flow is otherwise insufficient, such as during enforcement of remedies in connection with defaulted loans" or "if operating cash flow is not sufficient for that purpose in any particular period."

50. These disclosures omitted material facts and misrepresented the full extent of the investment risk. Although the private placement memorandum disclosed that some loans were not producing cash income, it did not disclose that the number of loans not producing current income was somewhere between 40 and 60 percent of the investment loan portfolio at all times.

51. Hershon knew, or was reckless in not knowing, that disclosure of these material facts was necessary in order to make the statements contained in the prospectus not misleading.

52. Similarly, while CFC's October 1, 2001 private placement memorandum disclosed that interest payments to noteholders "may" be made out of note proceeds in special circumstances, it did not disclose that, in the history of the IBF Funds, operating cash flows had never been sufficient to cover all interest payments due to noteholders.

53. Hershon knew, or was reckless in not knowing, that the disclosure of these material facts concerning the ability to make interest payments was necessary in order to make the statements contained in the private placement memorandum not misleading.

54. The CFC October 1, 2001 memorandum also contained a chart that purported to summarize the interest return yielded by each of the other IBF Funds and "the number of consecutive interest payments made" by each IBF Fund as of June 30, 2000. Nowhere did the prospectus disclose that the respective IBF Fund was able to make interest payments for as many as 55 consecutive months only because it was able to tap fresh offering proceeds - in many instances proceeds generated by other IBF Funds. Thus, the private placement memorandum misrepresented the source of CFC's interest return, which was a fact material to all investors.

55. Similarly, the Fund VI prospectus dated August 23, 2000 and a post-effective amendment dated July 16, 2001, each purported to summarize in a chart the same type of interest return data for the IBF Funds without disclosing that the respective IBF Fund was able to make interest payments for as many as 50 consecutive months only because it was able to tap fresh offering proceeds - in many instances proceeds generated by other IBF Funds.

56. Hershon knew, or was reckless in not knowing, that the disclosure of the true facts concerning the source of interest payments was necessary in order to make the statements contained in the disclosure documents concerning consecutive interest payments not misleading.

Fraudulent Disclosures About Loan Losses

57. Except for a limited time at Fund I, the IBF Funds have never disclosed loan losses in the investment loan portfolios. Instead, the financial statements simply stated in a footnote that:

Although there is no contractual requirement, from time to time the Parent [IBF] or a subsidiary of the Parent purchases receivables from [the IBF Fund]. Such purchases may be made to balance portfolios or have the Parent eliminate a potential loss on [the Fund]. Such purchases are made at [the Fund's] carrying value. As the Parent expects to purchase any uncollectible receivables from [the Fund], there is no allowance for bad debts provided.

58. Hershon established this policy shortly after Fund I commenced operations. Under this policy, IBF purchased loans from the IBF Funds in two circumstances: (i) where there was some question about collectibility; or (ii) where, for some other reason, collection was not expected before the IBF Fund was to be liquidated.

59. In these transactions, the purchase price IBF paid was the full amount outstanding on the acquired loan, including unpaid interest and fees, even if the loan was uncollectable. On the books of the IBF Fund, the principal, interest and fee receivable accounts were credited in full, as if the loan fully performed. To the extent IBF paid cash in these transactions, it usually derived the cash in other transactions with IBF Funds, such as by a loan from an IBF Fund, the receipt of management or other fees from the IBF Funds or by so-called "equity withdrawals" from the IBF Funds.

60. The effect of this policy was that, even if IBF wrote the loan off immediately upon purchasing it from an IBF Fund, the fact that the loan went bad was nowhere disclosed to prospective investors in the IBF Fund. Moreover, for statistical purposes, such as the publicly disclosed average loan return or average return of an IBF Fund, the IBF Funds treated loans purchased by IBF as if they fully performed.

Impact on CFC's Financial Statements

61. The IBF Funds did not comply with GAAP to account for IBF's purchases of non-performing loans and to calculate loan losses. GAAP required disclosure of the amount of the loan losses, even if IBF reimbursed the IBF Funds for them.

62. The impact of this policy on CFC's financial statements was material in 2000. CFC's unaudited financial statements for 2000 were included with the June 2001 and October 2001 supplemental private placement memoranda, which increased CFC's offering to $100 million and then $200 million, respectively. According to the income statement, CFC's net income in 2000 was $293,000. However, the income statement did not reflect that, on December 29, 2000, IBF acquired from CFC a loan that had an outstanding balance, including interest and fees, of a little over $1 million - a loan that IBF thereafter immediately wrote off as a bad debt. Had the existence of this bad debt been disclosed in CFC's income statement - at least in a footnote - the reader would have understood that, but for the parent's voluntary intervention, CFC would have sustained a substantial loss for the year.

63. Hershon knew, or was reckless in not knowing, that the failure to disclose loan losses sustained by CFC was materially misleading.

64. Because CFC's October 2001 prospectus announced the merger of Funds II and III into CFC, it attached Fund II's financial statements for 1999 and 2000, including the audited 1999 statements. At
year-end 1999, Fund II had total assets on its books of $6 million and a net income for the year of $244,000. Prior to December 30, 1999, roughly one-third of those total assets consisted of bad loans, which Fund II would have been required to write off. To avoid that result, on December 31, 1999, IBF acquired $2 million of Fund II's loan portfolio, all of which IBF wrote off the following year. Fund II's financial statements contained no disclosure of this related-party transaction, and the only generic disclosure came in a footnote resembling the one quoted above. Thus, the investing public was misled about the profitability of Fund II's investments and investment strategy.

65. Hershon knew, or was reckless in not knowing, that the failure to disclose IBF's purchase of bad loans from Fund II was materially misleading.

Impact on Return Statistics

66. In calculating return statistics, the IBF Funds did not account for IBF's purchases of non-performing loans. GAAP required disclosure of the effect that payments by the parent had on total return.

67. IBF published return statistics about the loans and the IBF Funds in private placement memoranda and prospectuses as well as in reports to investors and quarterly due diligence materials furnished to the brokers. For example, CFC's October 1, 2001 private placement memorandum contained a table that set out the "average loan return" for each of the IBF Funds through June 30, 2001. For purposes of calculating these statistics, IBF treated all loans it had purchased from the IBF Funds as if those loans had been repaid in full by the borrowers. Thus, the return statistics did not reflect the impact of write-offs. Moreover, if a loan was on the books of an IBF Fund at 24 percent interest, upon purchase by IBF, the IBF Fund reported the loan for statistical purposes as if it returned 24 percent.

68. The statistics contained in the table were materially overstated. Just the Fund II statistic, for example, reported an average loan return of 28.75 percent since inception. However, because one-third of Fund II's total assets was purchased and written off by IBF as a bad debt, the actual return figure was substantially less.

69. Hershon knew, or was reckless in not knowing, that this statistic was materially misleading.

70. The same is true with respect to the 29.52 percent return statistic for Fund I. Fund I had about $2.2 million in total invested assets. In 1998, IBF transferred to Fund IV (and eventually wrote off) one of its loans, amounting to nearly half the value of the Fund I portfolio. Yet, according to the table in the October 2001 private placement memorandum, Fund I had the highest "average loan return" of all of the Funds, and considerably higher than every other Fund except Fund II.

71. These return statistics were materially false and misleading because they led the investing public to believe that the IBF Funds were performing much better than they actually were. Moreover, Hershon knew, or was reckless in not knowing, that these return statistics were materially misleading.

72. IBF published quarterly, for the brokers, a table that purported to contain statistical data on all loans in the IBF Fund portfolios, and it published such a table at about the time of the supplemental CFC offerings in June and October 2001. One column in the table was dedicated to the "disposition" of each loan. Every IBF loan was listed as "repaid" or "outstanding." No loan was identified as having been written off. Another column in the table set forth each loan's individual return. Every "repaid" loan had a positive return. In every case in which IBF purchased a bad loan, the loan was treated for purposes of the chart as "repaid" and the return figure in those cases was based on all interest and fees accrued on the books of the IBF Fund at the time IBF acquired the loan. To the reader it appeared that the IBF Funds had no bad loans.

73. These tables were materially false and misleading because they led the investing public to believe that the IBF Funds were performing much better than they actually were. Moreover, Hershon knew, or was reckless in not knowing, that the tables were materially false and misleading.

Other Misleading Statistics

74. Two other misleading statistics contained in defendant CFC's offering and investor materials were loan maturity and collateral coverage data.

75. According to CFC's October 2001 supplemental private placement memorandum, the average maturity for the loans in CFC's portfolio was 13 months, while a report to investors, dated September 30, 2001, said that the average maturity for CFC's loans was 11 months. These two disclosures conveyed that the loans in the portfolio turned over quickly, suggesting a relatively stable, short-term portfolio of loans involving less risk than a portfolio of non-performing loans that had been on the books for years.

76. These average maturity statistics were materially false and misleading. Of twenty-five then outstanding loans, eighteen had been originated prior to September 2000, and thirteen of those had been originated in 1999 or before. Nowhere did CFC disclose that the published

maturity statistic did not measure duration from the date a loan was initially opened on the books of an IBF Fund.

77. Prior to the merger of Funds II, III, IV and VII in 2001, IBF and Hershon routinely moved loans from IBF Fund to IBF Fund. Each time IBF and Hershon transferred a loan between IBF Funds, the purchasing fund usually paid cash to the selling fund in the full amount of unpaid principal interest and fees on the books of the selling fund. The selling fund would mark the loan closed and treat it as having fully performed. The purchasing fund would treat the purchased loan as a "new" loan and assign it a new loan number. IBF calculated the maturity statistic from the date each "new" loan was opened, without regard to when the loan was actually originated.

78. CFC's supplemental private placement memorandum did not disclose the manner in which the maturity figure was calculated. As a result, the statistic was materially false and misleading because it led investors to believe that the IBF Funds were performing better than they actually were. Moreover, Hershon knew, or was reckless in not knowing, that the maturity statistic was materially false and misleading.

79. CFC's October 2001 supplemental private placement memorandum stated that CFC's loan portfolio at June 30, 2001 was "$79.3 million, secured by property we valued at $136.8 million." Similarly, a September 30, 2001 report to investors contained a collateral coverage statistic for CFC of 146 percent. The point was to promote the notion that this was a secure portfolio.

80. The supplemental private placement memorandum disclosed that the collateral value was in some cases based on internal assessments. However, it did not disclose that when an internal valuation was used - which was quite often - the valuation was not based on any established or standard valuation methodology. In many cases, the "valuation" was provided off-the-cuff in a phone call with the person managing the loan.

81. Particularly given the precision with which the statistic was disclosed to investors - 146 percent - the failure to also disclose the absence of any meaningful methodology to derive it was materially misleading, and led investors to believe that the IBF Funds were performing much better than was actually the case. Moreover, Hershon knew, or was reckless in not knowing, that the failure to disclose the lack of methodology was materially misleading.

First Claim for Relief

Violations of Section 7 of the ICA
(CFC and Fund VI)

82. The Commission realleges and incorporates by reference herein each and every allegation contained in paragraphs 1 through 81.

83. Defendants CFC and Fund VI are, and at all relevant times were, engaged primarily in the business of investing, reinvesting or trading in securities.

84. Defendants CFC and Fund VI hold themselves out as being, and at all relevant times did hold themselves out as being, engaged primarily in the business of investing, reinvesting or trading in securities.

85. Defendants CFC and Fund VI are engaged or propose to engage, and at all relevant times they were engaged or did propose to engage, in the business of investing, reinvesting, owning, holding, or trading in securities, and they own or propose to own, and at all relevant times they did own or propose to own, investment securities having a value exceeding 40 per centum of the value of their respective total assets (exclusive of Government securities and cash items) on an unconsolidated basis.

86. CFC and Fund VI, each having a board of directors, are investment companies within the meaning of Section 3(a) of the ICA, and they are not excluded from the definition of investment company under any other provision of the ICA.

87. Without registering under Section 8 of the ICA, CFC and Fund VI, directly or indirectly:

a. Offered to sell or did sell securities or interests in a security, or delivered securities after sale, whether the issuer of such securities is such investment company or another person; or offered to sell or have sold any such security or interest, or delivered securities after sale, having reason to believe that such security or interest will be made the subject of a public offering;

b. purchased, redeemed, retired, or otherwise acquired or attempted to acquire, or may be purchasing, redeeming, retiring, or otherwise acquiring or attempting to acquire, any security or any interest in a security, whether the issuer of such security is such investment company or another person;

c. controlled, or may be controlling, any investment company which does any of the acts enumerated above;

d. engaged, or may be engaging, in any business in interstate commerce; or

e. controlled, or may be controlling, any company which is engaged in any business in interstate commerce.

88. Such transactions of Defendants CFC and Fund VI were not merely incidental to their dissolution.

89. While engaged in the activities described above, CFC and Fund VI, directly or indirectly, made use, or are making use, of the means or instruments of transportation or communication in, or the instrumentalities of, interstate commerce, or of the mails.

90. By reason of the foregoing, CFC and Fund VI, directly or indirectly, singly or in concert, have violated, are violating, and unless enjoined will continue to violate, Section 7 of the ICA, 15 U.S.C. § 80a-7.

Second Claim for Relief

Violations of Sections 17(a)(2) and (3) of the Securities Act
(Fraud Upon Investors by CFC, Fund VI, IBF and Hershon)

91. The Commission realleges and incorporates by reference herein each and every allegation contained in paragraphs 1 through 81.

92. CFC, Fund VI, IBF and Hershon, directly and indirectly, singly and in concert, by use of the means and instrumentalities of interstate commerce, or of the mails, in the offer or sale of securities: (a) have obtained money by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (b) have engaged in acts, practices and courses of business which have operated as a fraud or deceit upon purchasers and other persons.

93. As part of and in furtherance of the violative conduct, CFC, Fund VI, IBF and Hershon, directly or indirectly, singly or in concert, in the course of the offerings described herein, have made untrue statements of material fact, or have omitted to state material facts. Among other things, the materially misleading statements or omissions pertained to (a) significant undisclosed related party transactions, (b) significant undisclosed loan losses, (c) financial statements and return statistics that were materially incorrect, (d) other statistics that were materially inaccurate or had no basis in fact.

94. By reason of the foregoing, CFC, Fund VI, IBF and Hershon, directly or indirectly, singly or in concert, have violated, and unless enjoined will again violate, Sections 17(a)(2) and (3) of the Securities Act, 15 U.S.C. §§ 77q(a)(2) and (3).

Third Claim for Relief

Violations of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 (Fraud Upon Investors by CFC, Fund VI, IBF and Hershon)

95. The Commission realleges and incorporates by reference herein each and every allegation contained in paragraphs 1 through 81 and 92 through 94.

96. CFC, Fund VI, IBF and Hershon, directly and indirectly, singly and in concert, knowingly or recklessly, by use of the means and instrumentalities of interstate commerce, or of the mails, in the offer or sale and in connection with the purchase or sale of securities: (a) have employed devices, schemes or artifices to defraud; (b) have obtained money by means of, or otherwise have made, untrue statements of material fact, or have omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) have engaged in acts, practices and courses of business which have operated as a fraud or deceit upon purchasers and other persons.

Prayer for Relief

WHEREFORE, the Commission respectfully requests a Final Judgment:

I.

Preliminarily and permanently enjoining all Defendants, their agents, servants, employees and attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5.

II.

Preliminarily and permanently enjoining defendants CFC and Fund VI, their agents, servants, employees and attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 7 of the ICA, 15 U.S.C. § 80a-7.

III.

Directing defendants CFC and Fund VI each to file with this Court and serve upon the Commission, a verified written accounting, signed by said defendants under penalty of perjury, setting forth:

(1) All assets, liabilities and property currently held directly or indirectly by or for the benefit of CFC or Fund VI, including but not limited to bank accounts, brokerage accounts, investments, business interests, loans, lines of credit, and real and personal property wherever situated, describing each asset and liability, its current location and amount;

(2) All money, property, assets, and other income received by CFC or Fund VI, or for their direct or indirect benefit, in or at any time from January 21, 1997 to the date of the accounting, describing the source, amount, disposition and current location of each of the items listed;

(3) All assets, funds, securities, real or personal property of investors in CFC or Fund VI, transferred to or for the benefit of Hershon or IBF in or at any time from January 21, 1997 to the date of the accounting, and the disposition by Hershon or IBF of such assets, funds, securities, real or personal property; and

(4) The names and last known addresses of all bailees, debtors, and other persons and entities which are currently holding the assets, funds or property of CFC or Fund VI.

IV.

Appointing a trustee pursuant to Section 42(d) of the ICA to take possession of the assets of defendants CFC and Fund VI in order to: (1) ascertain the true financial condition of CFC and Fund VI and the disposition of investor funds, (2) prevent misappropriation or misuse of corporate property and assets, (3) prevent the encumbrance or disposal of corporate property and assets, and (4) bring CFC and Fund VI into compliance with the ICA, or, (5) if that is not practical, to liquidate the assets of CFC and Fund VI for the benefit of investors.

V.

Ordering Defendants, their agents, banks, debtors, bailees, servants, employees, and attorneys-in-fact, and those persons in active concert or participation with the Defendants who receive actual notice of said Order by personal service, facsimile, or otherwise, and each of them, to hold and retain within their control, and otherwise prevent any withdrawal, transfer, pledge, encumbrance, assignment, dissipation, concealment, or other disposal of any of IBF's, CFC's or Fund VI's assets, funds or other properties that are contained in the escrow account created by a December 17, 2001 escrow agreement between IBF and the escrow agent pursuant to which the Commission is a third party beneficiary, pending a final disposition of the Commission's claims in this action.

VI.

Ordering defendants CFC and Fund VI to disgorge the amount of their ill-gotten gains, plus prejudgment interest, and such other and further amount as the Court may find appropriate.